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A unit of Baker Tilly International has landed the first censure of an auditor by the UK’s financial regulator after it allegedly failed to adequately prepare client asset reports.
The Financial Conduct Authority said on Thursday that MHA failed to prepare four client asset reports to the required standard between 2015 and 2019 relating to two regulated financial companies, and did not notify the regulator of as many as 25 rule breaches by the companies it had audited.
As a result, the FCA imposed a “public censure” against MHA, the UK’s 13th largest accounting firm by revenue last year. The Baker Tilly division was formerly known as MHA MacIntyre Hudson.
“In a first of its kind, this censure underscores the important role that auditors play in providing accurate reports on whether firms are complying with our rules,” said Therese Chambers, joint executive director of enforcement and market oversight at the FCA.
“This information helps us to safeguard customer funds and reduce the harm caused by firm failures. We expect all firms to ensure that they’re providing full and accurate reports.”
Under FCA regulations, companies that hold client assets are required to have an auditor provide a report to the watchdog on an annual basis. The importance of properly segregating client assets was highlighted during the 2008 global financial crisis, when the consequences of Lehman Brothers’ bankruptcy were prolonged, not least because of the mess of sorting out the trail of assets of customers and counterparties of the bank.
Following an investigation, the FCA found that MHA had failed to report rule breaches, ranging from failings in documentation, to firms’ assets being held alongside client assets.
Audit firms are typically regulated by the Financial Reporting Council, however, the breach in question relates to so-called client assets sourcebook (CASS) audit rules for investment firms, which are overseen by the FCA. The FRC oversees statutory audits under the Companies Act.
Around 3,100 financial companies, holding £175bn of client money and about £17.4tn of custody assets, are subject to the CASS rules, according to the FCA.
MHA said it “co-operated fully” with the FCA’s investigation, including “making proper admissions where the firm felt that its work fell below the high standards expected by MHA”.
It added: “We acknowledge the censure, and we are sorry that on this occasion our work fell below the standard required. We also note that the FCA has considered that no significant harm would have resulted from any of the unreported breaches and subsequently no financial penalties have been issued.”
MHA was last month hit with a separate £120,000 fine by the FRC for “numerous breaches” in its audits of MRG Finance, an entity set up to issue bonds to raise finance for its parent company.